Credit Score Models and Reports Initiative Fair Lending Resources
Industry participants have raised potential fair lending and consumer protection risks at stakeholder roundtables and in other industry communications during the Credit Scores and Models Report Bi‐merge transition. As a general matter, lenders may address fair lending and consumer protections risks arising for the transition through fair lending best practices and a robust compliance management system. There are several publicly available guidance documents that discuss best practices to manage the types of risks identified. See, e.g., Policy Statement on Discrimination in Lending, 59 Fed. Reg. 18267 (Apr. 15, 1994) (Interagency Policy Statement); CFPB Bulletin 2012‐4 (Fair Lending), Lending Discrimination (Apr. 18, 2012). See also FHFA Advisory Bulletin AB 2021‐04, Enterprise Fair Lending and Fair Housing Compliance (Dec. 20, 2021). Firms with a robust compliance management system identify, assess, monitor, and mitigate fair lending risk. See FHFA AB 2021‐04. Any potential fair lending issues identified concerning the Alternative Credit Score/Bi‐merge transition should be assessed, monitored and mitigated, in a manner consistent with a robust compliance management system. Id.
Disclaimer
Nothing on this page constitutes legal advice. Instead, this document recognizes these concerns have been raised and points Fannie Mae and Freddie Mac business parties back to federal guidance on managing these types of fair lending risks. If lenders have questions, they should consult with their legal counsel or compliance department to ensure their use of Bi‐merge credit reports and credit scores complies with all applicable laws.
Stakeholders raised concerns about potential unequal treatment between borrowers at the loan level.
- Example: Stakeholders suggested that there may be fair lending risk if a lender made a policy decision to pull two credit reports for some borrowers and three reports for other borrowers.
- Disparate treatment concerns might be evaluated in the context of appropriate lender policies that reduce or eliminate lender discretion and set clear criteria that are applied consistently to similarly situated borrowers. See FHFA AB 2021‐04.
- Disparate impact concerns might be evaluated in the context of whether “the challenged policy or practice advances a valid interest (or interests) and therefore [is] not arbitrary, artificial, and unnecessary.” 24 C.F.R. § 100.500(c)(2).
- Lenders might also evaluate whether “the substantial, legitimate, nondiscriminatory interests supporting the challenged practice could be served by another practice that has a less discriminatory effect.” 24 C.F.R. § 100.500(c)(3)).
Stakeholders raised concerns about potential unequal treatment between borrowers by different lenders.
- Example: Stakeholders suggested that there may be fair lending risk if Lender A’s procedures for use and implementation of the Bi‐merge process lead to a group of borrowers measurably having lower overall credit scores compared to Lender B’s.
- As a general matter, hypothetical comparisons of credit policies across firms are difficult to assess. However, firms have evaluated the fair lending risks posed by their business strategies as compared to peer firms.
Stakeholders raised concerns regarding potential unequal treatment of consumers by group.
- Example: Borrowers that typically have less credit history than others, such as first‐time homebuyers or certain minority/ethnic groups, might be disadvantaged by a credit scoring process that uses only two credit reports rather than three.
- Disparate impact concerns might be evaluated in the context of whether the challenged policy or practice “advances a valid interest (or interests) and therefore [is] not arbitrary, artificial, and unnecessary.” 24 C.F.R. § 100.500(c)(2).
- Lenders might also evaluate whether “the substantial, legitimate, nondiscriminatory interests supporting the challenged practice could be served by another practice that has a less discriminatory effect.” 24 C.F.R. § 100.500(c)(3).
Stakeholders raised concerns about credit score disclosures under the Fair Credit Reporting Act.
- Example: FCRA requires a lender to provide a “credit score” that was used in the credit decisioning as part of an adverse action notice. Under Credit Score Models and Reports Bi‐merge, lenders may need to report an averaged credit score that was used in the decision but is not an actual score that is reflected on a credit bureau report.
- Appendix C of Regulation B (which implements the Equal Credit Opportunity Act) provides the adverse action model forms that creditors may use to meet the statutory requirements under § 615 of the FCRA.
- Appendix C provides model forms, including model form C‐3, for instances where a proprietary score may be used. See 76 Fed. Reg. 41590, 41594 (https://www.federalregister.gov/documents/2011/07/15/2011‐17585/equal‐ credit‐opportunity);
- According to the Federal Reserve, a lender would “comply with the statute by disclosing any of the credit scores that it used.” See 76 Fed. Reg. 41594.
- "A creditor may design its own notification forms or use all or a portion of the forms contained in the Appendix." Paragraph 5 of Appendix C. See also paragraphs 3 and 4 of Appendix C and 76 Fed. Reg. 41595.
